BRASILIA (Reuters) — Standard & Poor's
cut Brazil's sovereign debt rating closer to speculative territory
on Monday in a blow to President Dilma Rousseff, whose efforts to
stir the economy from a years-long slump have eroded the country's
finances.
Brazil had its long-term debt rating downgraded to BBB minus, the
agency's lowest investment-grade rating. S&P changed its outlook to
stable from negative, meaning further downgrades are unlikely for
now, which will come as a relief for both politicians in Brasilia
and financial markets.
The move was widely expected but the timing surprised some
investors.
As it came ahead of an October election in which Rousseff will seek
a second term, the downgrade will expose her left-leaning government
to further accusations that it has squandered the goodwill built
during a long economic boom last decade.
Brazil has suffered from slow growth that averaged about 2 percent
in recent years. Rousseff has tried to revive the economy with tax
cuts and social spending but has been widely criticized for
intervening too much and resorting to sometimes opaque accounting
moves to meet budget targets.
"The downgrade reflects the combination of fiscal slippage, the
prospect that fiscal execution will remain weak amid subdued growth
in the coming years, a constrained ability to adjust policy ahead of
the October presidential elections, and some weakening in Brazil's
external accounts," S&P said.
The agency said that fiscal credibility had been "systematically
weakened" following cuts in the government's main budget target, and
that loans by state-run banks had "undermined policy credibility and
transparency."
The Brazilian finance ministry rejected S&P's arguments and said the
downgrade contradicted Brazil's solid economic fundamentals and
healthy standing compared with other major economies.
"The Brazilian economy has low external vulnerability because it
holds the fifth largest volume of international reserves among G20
nations," it said in a statement.
The short-term effect of the move on financial markets was unclear,
analysts said. Some investors could sell Brazilian assets because of
policies forcing them to hold higher-quality stocks and bonds, while
others may focus on the fact that S&P is unlikely to downgrade
Brazil any further.
S&P's move could prompt peers Moody's Investors Service and Fitch
Ratings to signal they may follow with a downgrade of their own.
"The natural tendency for markets tomorrow is the fear that there
could be a chain reaction and other agencies may do the same," said
Ariovaldo Santos, manager of floating-rate assets at H.Commcor in
Sao Paulo.
Moody's and Fitch, which still rate Brazil two notches into
investment-grade territory, have indicated, however, that they do
not intend to downgrade Brazil before the elections.
Rousseff's government has worked to restore its credibility on
budget targets in recent months, but investors are worried that she
will resort to more unorthodox accounting moves and raise spending
as she seeks re-election.
The downgrade is unlikely to undermine Rousseff's popularity among
voters, but potential rivals blamed her management of the economy
for Brazil's fall from grace on financial markets.
Opposition leader Aécio Neves said the downgrade was due to the
"manipulation" of fiscal accounts by her government, "exorbitant"
public spending and "leniency" with inflation.
"Brazil is going through a sad moment of loss of confidence and
ruined credibility," he said in a statement.
(Additional reporting by Priscila Jordao;
editing by Brian Winter,
Kieran Murray, Bernard Orr and Lisa Shumaker)
Brazil had its long-term debt rating downgraded to BBB minus, the
agency's lowest investment-grade rating. S&P changed its outlook to
stable from negative, meaning further downgrades are unlikely for
now, which will come as a relief for both politicians in Brasilia
and financial markets.
